“... doing the same thing over and over again, but expecting different results.”
The Bahamas recently became the first country to issue a Government Issued Digital Currency CBDC.
Why this is not big news ...
Lets reflect on the role of a central bank for a moment. A central bank generally does two main things, they print money and issue sovereign debt. These are two key levers in modern finance for governments to regulate their economy. The purpose of a governments finance department and the role of the central bank is to maintain a balance with these two levers to keep the economy growing, preferably at a steady pace to avoid boom and bust cycles.
The Problem …
Because governments can just print money as they want this means they are open to abusing the system which erodes confidence and value of a countries currency.
Asset Backed
One of the ways that evolved over time to control this was to peg a currency to some standard. Silver and Gold (two precious and scarce metals) were used at various periods in history. A government would back each note printed by a certain weight of the precious metal.
The gold standard reduced inflation and provided certainty for international trade.
This system is no longer in use by governments!
A similar approach to the gold standard has been taken in the cryptocurrency world. Two examples:
- Tether is pegged to the US Dollar
- Tether Gold is pegged to the price of Gold
There are many other pegged cryptocurrencies and some also claim to be backed by reserves of USD, Gold, Silver …
This approach to pegging is analogous to how the Gold Standard Worked, and also has many parallels to Banking.
Why are we expecting different results? ...
While Pegging and Asset Backing is an old idea, and has been proven to have limited longevity there are some new novel approaches
Market Price
Some cryptocurrencies have taken an approach to create a market mechanism to automatically peg the exchange rate to a currency or asset using some mechanics of the ecosystem they are built on. The Hive Backed Dollar (HBD) is one example where supply and demand is controlled by being linked via market mechanisms.
Its woth noting the Market Price has major issues, it requires scale and liquidity and an efficient market. At least the Market Price approach is trying something new!
Digital Currency
"It's not real."
I always find this amusing when I hear people being dismissive of cryptocurrency, yet have no problem signing a cheque, or tapping their debit card for coffee. Virtual currency is not a 20th century construct, it’s been around for a long time. “Promises” have fuelled global trade for centuries and when the banking system went digital we first got "Digital Currencies".
Something New ...
Cryptocurrency
What Bitcoin brought to the table is a way of avoiding intermediaries and having a digital native medium of exchange that can be used by the masses. There are many variations of cryptocurrencies which have pros and cons and different uses. Privacy coins, Tokens and even Security Coins may have some alternative value, to name a few.
The exception are Stablecoins which in many ways are not an innovation and actually cause more problems than they solve.
Government issued stable coins "Govcoins" are not really going to benefit much from “going digital” as this type of currency (fiat) is more influenced by politics, policies, control, privacy, regulations. The form it takes; paper, digital, plastic makes little difference.
On the other hand pegged Stablecoin Assets are effectively just another type of Bank Account. They take your “real” money and promise you to hold a reserve for it. The elephant in the room is they are not regulated, or at least not at any level like a banking institution. Looking at Tethers website they seem transparent (there are published figures) but in reality it's hard to determine how reliable these figures are.
What are your thoughts on Stablecoins, Insane or not?
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